What’s an umbrella insurance policy? Do I need one?
Why doesn’t anyone ever tell you not to buy an
umbrella liability policy? It seems like additional
overall security for pennies. Sure, you can spend
pennies paying for something you don’t need or will
never use, but isn’t that the argument against all
insurance? Let’s run some numbers and see if this
kind of policy protects you.
As financial planners, we help people make good
money decisions, including protection of what you’ve
accumulated over the years or are about to
accumulate. To those ends, an umbrella liability policy
adds another layer of insurance to your home and
auto liability coverage. Umbrella liability usually
comes in increments of $1 million and costs maybe
$200 a year for the first million and less to cover
additional millions of value.
Who needs an umbrella policy?
Umbrella liability beefs up regular coverage for those
who might need more protection: the rich, those with
swimming pools, trampolines, nasty pets or owners of
more than one car – especially if a teenager drives
one of them. Travel often to dangerous parts of the
world? Throw a lot of wild parties? Throw those wild
parties at your beach house with lots of high surf right
nearby? You might need a little extra coverage.
If you’re like most middle-class folks, though, you
might have $100,000 equity in a home, $100,000 in
retirement accounts and $25,000 in savings. If your
auto and home liability coverage is $300,000 or more,
why get this additional coverage? In many cases,
don’t: most retirement accounts offer creditor
protection. So now you only need protection for your
$125,000 of equity and savings, right?
Well, maybe. That’s the rub. Think of lawsuits and
government judgments from the likes of the Internal
Revenue Service, awarding plaintiffs millions and
leaving you destitute. If you don’t have enough assets
they can get to, they might garnish your wages
(remember, garnishment ordered by a federal court
can seize only 25% of your weekly disposable
income, even less in some states’ courts).
What an umbrella policy covers
So, what does an umbrella liability policy cover? Well,
according to the National Association of Insurance
Bodily injury liability. Covers the cost of damages to
another person's body, such as medical bills and
liability claims as a result of injuries due to an auto
accident that’s your fault, harm to others caused by
your dog (you probably should have taken him to
obedience school), injuries to a guest in your home
because of a fall or injuries to a neighbor's child who
trips while playing in your yard.
Property damage liability. Covers damage or loss to
another person's tangible property. Examples include
damage to vehicles and other property as a result of
an auto accident that’s your fault, damage claims
incurred when your pet shreds a friend's priceless
Oriental rug or accidental damage to school property
caused by your child.
Owners of rental units. This helps protect against
liability you may face as a landlord. Examples include
the claims’ cost as a result of someone tripping over a
crack in the sidewalk of your rental property and suing
you, or your tenant’s dog biting someone who holds
you responsible for the cost of injuries.
Slander. You’re also covered if you’re sued for
slander or libel (injurious spoken or written
statements), false arrest, detention or imprisonment,
malicious prosecution, shock or mental anguish and
other personal liability situations.
Consider this example of an auto accident—your
fault, of course—where others are hurt to the tune of
$500,000. The bodily injury limit on your auto
insurance tops out at $300,000. Who covers the
remaining $200,000? Your umbrella policy.
It does not cover:
intentional damage by you or a member of
your family or household;
damage related to a business activity;
profession claims connected to an agreement
claims resulting from owning, maintaining and
using non-traditional recreational vehicles
such airboats, jet skis and planes;
damage to your own property;
damages covered by workers’ compensation
claims in relation to insurrection or war.
Of course, your policy will have specific language as
to what is and is not covered, but at least now you
can begin thinking intelligently about whether you
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